Question

You own $14,760 of Denny’s Corp stock that has an assumed beta of 2.90. You also own $29,028 of Qwest Communications (assumed beta = 1.50) and $5,412 of Southwest Airlines (assumed beta = 1.08). Assume that the market return will be 11.0 percent and the risk-free rate is 6.0 percent.

What is the market risk premium?

What is the risk premium of each stock? (Round your answers to 2 decimal places.)

           

What is the risk premium of the portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.

Answer 1

a) Market risk premium (Rm-Rf) (0.11-0.06) 0.05 5.00% Denny's risk premium Beta*(Rm-Rf) 2.90*(0.11-0.06) 0.145 14.50% Qwest's risk premium Beta*(Rm-Rf) 1.50*(0.11-0.06) 0.075 7.50% Southwest Airlines risk pren Beta*(Rm-Rf) 1.08*(0.11-0.06) 0.054 5.40% Proportion 0.30 Beta 2.9 Denny Qwest South airlines Investment $ 14,760.00 $ 29,028.00 $ 5,412.00 | $ 49,200.00 0.59 1.5 Proportion*Beta 0.87 0.885 0.1188 1.8738 0.11 1.08 Portfolio Beta Portfolio Beta 1.87 Risk premium of Portfolio Portfolio Beta*(Rm-Rf) 1.8738*(0.11-0.06) 0.09369 9.37%